Interest Rate Pass-Through in Turkey and Impact of Global Financial Crisis: Asymmetric Threshold Cointegration Analysis

Article excerpt

1. Introduction

The outbreak of global economic and financial crisis starting in 2008 has attracted a lot of studies, which emphasize the importance of the monetary transmission mechanism. To evaluate the performance of monetary policy, interest rate transmission channel turns out to be essential for conducting interest rate pass through analysis. Interest rate passthrough is described as the degree and speed of adjustment in banking retail interest rates to changes in monetary policy rates. High interest rate pass-through defines the close link between monetary policy rate and retail banking rate. Since individuals and financial agents shape their investment, saving and consumption decisions with respect to deposit and lending rates (banking retail rates), it is important for central banks to influence the banking retail rates through monetary policy actions. For this, central banks use monetary policy rates to affect banking retail rates. Efficiency of this mechanism is important especially for countries using interest rate channel as the monetary policy transmission mechanism. Complete pass-through means that changes in policy rates are totally transferred to banking retail rates so monetary policy decisions can be implemented successfully by central banks. Such a pass-through mechanism indicates the effectiveness of interest rate channel in establishing price stability and strong banking system.

Especially for inflation targeting countries, the relationship and adjustment degree between policy rate and banking retail rates are highly examined under the concept of interest rate pass-through (see e.g. Kwapil, Scharler 2006; De Bondt 2005; Sander, Kleimeier 2004). Turkey implemented implicit inflation targeting regime between 2002 and 2005 (Kara 2006). After that, explicit inflation targeting regime is accepted as main monetary policy stance. Thus, there are two studies focusing on interest rate pass-through in Turkey after the inflation targeting regime conducted. Aydin (2007) previously analyzed the interest rate pass-through in Turkey using linear cointegration. Aydin (2007) uses data for individual banks operating in Turkish banking system and classifies loan types to include corporate, housing, cash and automobile loans. The data set includes all public, private, foreign, investment and development banks. Thus, Aydin (2007) explores cointegration relationships in panel data and reveals the sources of heterogeneity in price setting behavior of banks in different types of loans. The empirical results revealed that monetary policy decisions are transmitted to loans market within a quarter. Housing loans are the most responsive rates to changes in the policy rate whereas; cash and vehicle rates are less responsive. Commercial loans were found to be adjusting incompletely.

Ozdemir (2009) also investigated pass-through mechanism from money market to retail rates between 2001 and 2006 in Turkey using symmetric and asymmetric error correction method. The estimation results indicated that retail rates adjust completely in the long run however, in the short run loan rate is flexible compared to deposit rate.

Within this perspective, the aim of this study is to examine interest rate pass-through mechanism in Turkey using asymmetric threshold cointegration method to capture the asymmetric behavior (if exists) of interest rate channel during the period December 2001 to April 2011. The superiority of this method with respect to traditional linear cointegration method is that asymmetric cointegration method takes into account asymmetric adjustment process among the interest rates, and nonlinearity in the pass-through mechanism due to asymmetric information or market structure (Wang, Lee 2009). Thus, when we analyze the interest rate pass-through mechanism in Turkey, we choose to employ asymmetric cointegration method following Enders and Siklos (2001) to observe (if there exists) asymmetric long run relationship between the monetary policy rate and banking retail rates. …